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Date
11 December 2012

Mishcon Thinks: Shareholder Activism

In this film Saul Sender, Corporate Partner, is in conversation with broadcaster Katie Derham on what we have learnt from the Shareholder Spring and what the future may hold for companies and activists alike.

Transcript

Mischon Thinks:  Shareholder Activism

Katie Derham

Saul Sender you are a Corporate Finance Partner at Mishcon de Reya.  Let’s talk about Shareholder Activism.  We’ve had what was called the Shareholder Spring, what’s changed?

Saul Sender
Partner, Corporate Finance

Well this year has been a very interesting time to be a Shareholder of a Public Company.  Normally the Annual General Meeting season, often held in the spring, just goes by without many people noticing and this year there’s been a real ground swell of shareholder activism.  Shareholders when faced with a vote about a company’s remuneration policy, this time they are indicating their dissatisfaction with the pay of Directors and sometimes voting down resolutions to approve the remuneration report of listed companies.

Katie Derham

Most of the headlines were about pay, and boardroom pay, how much success did the shareholders have. 

Saul Sender

Well, if you look at shareholders on a legal basis the success was very, very slight.  Only four companies had their remuneration report voted down by shareholders at their Annual General Meeting.  And actually in each of those four cases there was no legal obligation on the boards to change the remuneration policy because the vote is only instructive and not legally binding.  However if you look in the court of public opinion you can really see a ground swell of shareholders saying ‘we don’t like what’s going on, we think some Directors are being overpaid for the performance they are receiving’ and sending a very strong message to boards that maybe they should rethink what they were putting to shareholders.

Katie Derham

In your opinion, do you think though that message, empty as it is perhaps at the moment without any legal teeth if you like, is that going to change, are they going to change their ways at all?

Saul Sender

I think in a lot of cases they have and the way that the shareholdings of public companies work it’s often the message that’s more important than the legal impact.  So in a number of cases CEO’s have resigned or have been forced to resign because a vote was been taken where a significant minority voted against the report.  So technically they didn’t have to go, but actually it was very strong indication from shareholders that what was going on wasn’t right and they wanted some change.

Katie Derham

Was it a blip do you think or is it the kind of behaviour we are going to see more and more?

Saul Sender

I think a lot of people in this country have a very genuine and deep seated concern that people who run companies are paid too much and this comes a lot from people talking about the banks.  A lot of the banks took public money, they’ve not lent on the money they took from the government and yet there is a perceived, in fact a very real sense of failure and yet Directors’ pay seems to be going up.  So this has created very much a movement towards a society looking at how much people are being paid and assessing is this fair.  One omination of this was the occupier movement seems to have gone away at the moment and many other things that they advocated I don’t think people would support in the city and yet a lot of things they did say that things have gone out of kilter have struck a cord and the Shareholders Spring is definitely one aspect of that.  Other aspects of the causation of this are the multiplicity of media sources.  When people have a message these days and shareholders want to get a message out to Directors they don’t really have to wait for the AGM, they can get on their social media, they can use the many forms of media to start a campaign.  So people can attack policies from a number of different angles, they can vote against it, they can ask for resolutions to be put to the company and they can use the press to further their goals.

Katie Derham

Do they have any power in a legislative sense?  How has the legislative framework changed in order to support that shareholder power?

Saul Sender

Well that’s a good question.  From the 2006 Companies Act, shareholders who own 5% of the equity of a company can require, in fact requisition a meeting of the company to be held and they can suggest the language or suggest they can require the language of that resolution to be put to the shareholders of the company.  Now they may or may not be successful that 5% can’t necessarily give the 50% that you need to succeed, but they can really force their agenda on the company and in certain circumstances they can require the company to send a circular to its shareholders setting out the reasons why they want to support the resolution.  Normally this kind of resolution relates to the identity of the Directors because that’s the easiest resolution to get through, get through the process of approving, of approval through shareholders and once your slate of Directors have changed then maybe those Directors that have come on the board can affect or at least have a less entrenched position to the change that you want advocate.

Katie Derham

It very much feels as if, that Shareholder Activism is getting more credible, that it’s no more the preserve of troublemakers and nutters.

Saul Sender

That is a very good observation.  I mean maybe 10 or 15 years ago anyone would want to avoid the moniker of Shareholder Activism because partly for that reason and also they had a bad reputation for being entirely selfish and looking after their own goals.  I think there has been a sea change in the way the city as a whole has looked after Shareholder Activism.  I think it is part of perhaps the new debate we’ve had about capitalism since the recession.  I think people acknowledge that the capitalist system requires people to look after our own interests and yet people are also accepting that there may be some beneficial consequences of that.  I think what’s important is that it is done in an open and honest manner.  Shareholder Activism really puts that to the fore because it puts debate that may have previously taken place in smoke filled rooms in the city between fund managers from very narrow world and boards and often they’ve come from the same places and come from the same institutions where is now Shareholder Activism is more out there, it’s an open and multi-voiced debate and I think that’s good for any democracy and our capitalist system kind of works off that debate and the more of it the better.

Katie Derham

I mean is there such a thing as a typical Shareholder Activist?

Saul Sender

There isn’t.  I mean they come in all colours and creeds.  I mean at one end of the spectrum there are a number of ethical investors who have used Shareholder Activism as a means of furthering their agenda.  For example, there was a group of activists who disagreed with, I think it was Shell’s plan to extract oil from the wilderness in Canada and they teamed up with some investment companies and they used the requirements of the Companies Act to put a resolution to the Board of Shell and at the same time they had an agenda of publicising it and as it happened Shell were very interested in listening to what they had to say and then they reached some kind of agreement without necessarily putting it to the vote.  So that was a very successful way of furthering an ethical cause.  On the other hand there are a number of hedge funds who are always of course looking to making a return for their investors, they look for undervalued companies, they take a stake and they say we want some change.

Katie Derham

So why would a Shareholder Activist want to or need to use a lawyer?

Saul Sender

Well aside from being very user friendly people, there is a number of reasons.  I mean firstly activating the mechanisms that Company Law provides you that’s something that we do all the time and we can advise Shareholders on how best to use those powers.  Secondly when dealing with the media, you often have to tread a very fine line between making sometimes very strong and often personal statements about Directors and their capabilities with the risk of defaming those Directors and we advise our clients on how to stay the right side of that line.  Also some Shareholders have looked at litigating against the companies in which they have a stake, there is part of the Companies Act that allows Shareholders, effectively by proxy, to require the company to take an action against its Directors.  Directors generally owe their duties to the companies who act in the best interest of Shareholders, if the company as controlled by the Directors isn’t willing to take that action then in certain circumstances Shareholders can go to court and require the company to bring a claim against the Directors and that’s another thing in the armoury of the Shareholder Activist.

Mishcon de Reya